Apartment Income REIT Earnings: Strong Revenue and NOI Growth Despite Falling Occupancy

Second-quarter results for Apartment Income REIT AIRC were mixed compared with our expectations, though we didn’t see anything in the quarter that would materially change our $52 fair value estimate for the no-moat company. Same-store occupancy fell 190 basis points sequentially and 110 basis points year over year to 95.5% in the second quarter, well below our estimate of flat occupancy. However, average rental rates improved 10.0% year over year, above our estimate of 6.1% growth, leading to same-store revenue growth of 8.8% that beat our 7.8% growth estimate. Additionally, same-store operating expenses only increased 4.1% in the second quarter, below our estimate of 6.0% growth, leading to same-store net operating income growth of 10.6%, which was ahead of our 8.4% estimate. Apartment Income REIT reported pro forma funds from operations of $0.58 per share in the second quarter, which is $0.02 below our estimate of $0.60 for the quarter.

While second-quarter FFO came in below our estimate, management’s guidance range of $0.61 to $0.65 pro forma FFO for the third quarter puts our third-quarter estimate of $0.61 at the low end of the range. Full-year pro forma guidance was narrowed to a new range of $2.38 to $2.44 while maintaining the $2.41 midpoint, which keeps our $2.43 estimate within the updated guidance range. Additionally, same-store revenue growth for 2023 was narrowed to a new range of 7.8% to 8.6%, while the midpoint was slightly raised by 20 basis points, which led to management narrowing same-store NOI growth to a new range of 8.6% to 9.8%; this raised the midpoint by 40 basis points. While same-store growth is expected to slow slightly in the second half of the year, the gains the company made in the first half of the year should translate into strong second-half, bottom-line growth.